Electronic trading is a mode of trading that uses information technology to bring together a buyer and a seller of a tradable object through electronic media to create a virtual market place. Originally stock markets used to be a physical location where buyers and sellers met and negotiated. With the improvement of the communication technology the need for physical co-location no longer is of any importance as the buyers and sellers can electronically exchange trade orders as well as negotiate with each other from a remote location. An increasing number of financial assets are traded in “limit order” markets around the world. In such markets traders can submit market orders and limit orders. Market orders trade at the best available price posted by previously submitted limit orders which make up the electronic limit order book. A limit trade order is a conditional buy or sell at a pre-specified price and is stored in the electronic book until cancelled or hit by an incoming market order. A limit trade order trades at a better price than a market trade order. However, there are two types of costs to submitting a limit order. First, the order may fail to be executed. Second, the limit order may execute against a market order that is based on private information (adverse selection). In this case, limit orders trade at the wrong side of the market. This is also referred to as a picking-off risk.
Share trading is anonymous in most major stock exchanges in that only the price p and quantity q for bids and asks are visible in the electronic order book. Traders include in their trading decisions allowance for adverse selection, i.e. the risk that posted bids and asks include private information about future stock price movements. Thus, trading with anonymous orders has the consequence that traders wishing to trade for non informational reasons, i.e. for liquidity, have also to pay an adverse selection penalty.
FIG. 1 shows a typical limit electronic order book as employed in most stock markets. Electronic order books are real time systems that typically have latencies from order arrival to action, i.e. execution or placement of orders on the book. In a typical electronic order book a trader can communicate by means of five message types, i.e. market buy, market sell, bid, offer and cancel. The bid and offer messages contain prices as well as quantities. Market buys and sells are executed immediately or cancelled. All messages are cancelled at the end of each trading day. As long as the orders are in the FIFO-buffer they are matched against each other. Any exact match of two orders on price and quantity is executed. Unmatched orders are executed immediately against the book in a strict price and time priority if possible, or placed on the book with a time-stamp. A confirmation message is then returned to the trader with an order confirmation number that can be used for cancellation.
The trading occurs on screen based anonymous electronic markets such as NASDAQ or more recently alternative creating platforms such as INET or ECN. These venues are generally called “downstairs markets”. Trading is anonymous in that only trade direction (buy/sell), price p, quantity q and a time-stamp are visible.
For large traders so called “upstairs markets” exist and traders with reputations for non informational trading obtain improved prices. Prices in upstairs markets are better for the traders because the participants do not have to pay the worst selection costs of trading with potentially better informed counter parties. In these upstairs markets it is vital for the traders to have a reputation that they are trading for non informational purposes, e.g. liquidity, in order to obtain improved prices.
However, the upstairs markets have the disadvantage that they are not automated and do not have the participation of the full trader population. Because of the existence of upstairs markets the anonymous electronic markets, i.e. the downstairs markets, loose liquidity and value streams because traders cannot build an identity linked reputation in these downstairs markets in order to obtain improved prices.
Accordingly, it is an aspect of the present invention to provide a method and a system to link anonymous trade orders with an identity of the respective trader.